Alphabet Announces Google’s Results: Mobile, YouTube And Programmtic Ads Shine Through
Alphabet (NADDAQ:GOOG,GOOGL) announced Google’s results on October 22nd and the company reported 13% year-on-year growth in revenues to $18.7 billion, in line with our expectation. On a constant-currency basis, revenues grew 21%. However, pricing pressure on online ads resulted in a 11% year-over-year decline in aggregate cost-per-click (CPC). Aggregate paid clicks, which represent the number of ads served across Google properties and its member website, grew by 23% year over year. The movement in Google Sites paid clicks and CPCs primarily reflects the continued growth in YouTube TrueView. Furthermore, the company said that the momentum in its mobile and programmatic platform was instrumental in revenue growth in Q3. In this note, we will discuss Google’s results.
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Programmatic Platform Buoys Number of Clicks Grow Even As Cost-Per-Click Continues To Decline
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We currently estimate that PC search ads and mobile search ads contribute approximately 68% to the firm’s value. Online ad spending is expected to increase in general and reach $155 billion in 2015. Cost per click (CPC), a metric that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years. The recent trend is indicative of geographical mix, device mix, currency headwinds and property mix, though the company has stated that it will continue to monetize mobile devices effectively. Note that a key part of the decline has resulted from the rapid growth of YouTube, where a majority choose to use TrueView ads, which monetize at lower rates than ad clicks on Google.com. As a result, the aggregate CPC (CPC for both mobile and PC from search and display) declined by 11% year over year for Google sites during the quarter.
Additionally, Google is looking to monetize its properties through its programmatic platform, which matches relevant ads with content, as well as through an increase in user-generated online content. The number of advertisers using Google’s programmatic solutions has nearly doubled in the last year-and-a-half, and now includes over 80% of Ad Ages top hundred advertisers. However, this is negatively impacting Google’s CPC as the programmatic platform does away with inefficiencies of improper ad matching. As a result, the company’s top line growth from search ads has failed to match the growth in search volume. Google is focusing on its programmatic businesses including AdMob, AdExchange, DoubleClick Bid Manager, and these continue to grow at a strong rate. Going forward, as Google improves its programmatic platform, we expect that the growth in online advertising will grow but continue to weigh on CPC.
Revenues From Mobile Ads To Grow
The mobile search ads division is the second largest division for Google and makes up approximately 37.3% of its total value, according to our model. Google, with 90% market share, dominates the mobile search engine market. One of the key reasons for this dominance is its flagship Android OS, which has witnessed excellent adoption and penetration in the smartphone space. Android is now used by over 400 OEMs and over 500 carriers, who make over 4,000 distinct devices.
A user with an Android phone is more likely to use Google search compared to a user using another OS. In Q3, Google reported that more searches now take place on mobile devices than on computers globally. As part of its strategy, it remains focused on building the mobile ecosystem that has the right ad formats and measurement to take advantage of all the platform ads. It launched deep links to surface app content during mobile search. Its mobile services like Now on Tap, which is essentially uses machine learning, lets user access additional useful information based on recent search and present location. We believe that as Google’s mobile ads strategy continues to evolve, the aggregate paid clicks will increase and boost the number of ads sold in coming quarters.
Google Play Store for Content
The Google phone division makes up 10.5% of its estimated value. Considering the growth of Google’s Android platform and the growth in smartphone adoption globally, Google’s Play store is fast becoming a vital cog for Google’s growth. During the quarter, the number of users for Google Play exceeded 1 billion. We expect this figure to grow and forecast digital content revenue to grow to $8.51 billion by the end of our forecast period.
YouTube Boosts Ad Volumes
In our pre-earnings note, we mentioned that we would be closely watching YouTube because it caters to the rapidly growing online video ad market. During the earnings call, we got some encouraging metrics from management, which makes us confident about YouTube as an essential driver of revenue growth, going forward. The company launched YouTube Red, a subscription service for just $9.99 a month. It enables user to see videos on YouTube without ads, watch them offline, or keep playing videos when the screen is locked. Going forward, YouTube is important for Google even though, according to our estimates, this division constitutes just under 3.4% of its value.
We are in the process of updating our model. We currently have a $657 price estimate for Google, which is 5% below the current market price.
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